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Choosing the correct filing status is really the first step that you take in ensuring that you will end up with a properly prepared tax return.
Choosing Your Filing Status Choosing the correct filing status is really the first step that you take in ensuring that you will end up with a properly prepared tax return. You need to appreciate this, because your filing status determines a number of things, such as; filing requirements, deductions, credits, tax rate, and ultimately, your correct tax refund or tax liability. You must choose from one of five filing statuses, and you must know which one is correct for you. The five filing statuses are: (a) Single, (b) Married Filing Jointly, (c) Married Filing Separately, (d) Head of Household, and (e) Qualifying Widow(er). If more than one filing status applies to you, you may choose the one that gives you the lowest tax rate. SINGLE You are single if: You are unmarried on the last day of the tax year. You are divorced or legally separated under a separate maintenance decree on the last day of the tax year. You are widowed before the first day of the tax year and have not remarried during the tax year. You normally file Single if you do not qualify for any other filing status. Filing Single generally attracts a higher tax rate, and a lower standard deduction than some of the other filing statuses. MARRIED FILING JOINTLY (MFJ) You can file Married Filing Jointly if you and your spouse meet any one of the following tests: You are married and living together as husband and wife. You are married on the last day of the tax year and living apart, but are not legally separated under a decree of divorce or separate maintenance. Your spouse died during the year and you did not remarry during the year. You are living together in a common law union recognized by the state where you live, or in the state where the common law union began. In order to file jointly, both spouses must: Include all their income, exemptions, and deductions on the joint return, and Use the same accounting period. The MFJ filing status generally has the lowest rate of tax, and is the more favorable filing status for married couples. If your spouse dies during the tax year, and you remarry during the year, you may file MFJ with your new spouse. You deceased spouse’s filing status would have to be Married Filing Separately. To file MFJ, both the spouses need not have income, however both spouses are responsible for the joint return, and both must sign the return. Nonresident and dual-status alien A joint return cannot be filed if either spouse was a nonresident alien at any time during the year. However, if at the end of the year one spouse was a nonresident alien or dual-status alien married to a U.S. citizen or resident, both spouses may choose to file a joint return. In this case, both spouses will be taxed as U.S. citizens or residents for the entire year, and the nonresident spouse must report all income (domestic and foreign). Annulled marriages If one spouse obtains a court decree of annulment (which holds that no valid marriage ever existed), both spouses must file amended returns claiming a filing status of Single or Head of Household, whichever applies, for all prior tax years affected by the annulment that are not closed by the statute of limitations. Divorced taxpayers Both spouses may be held jointly and individually responsible for any tax, interest, and penalties due on a joint return before the divorce. This responsibility applies even if the divorce decree states that one spouse will be responsible for any amounts due on previously filed joint returns. MARRIED FILING SEPARATELY (MFS) You can consider filing Married Filing Separately if: You are married, but want to be responsible for your taxes only. You are married, but you and your spouse do not agree to file jointly. When you file MFS you report only your own income, exemptions, credits, and deductions. Filing MFS usually puts you at a disadvantaged position, and usually means paying more taxes than filing MFJ. This is so because MFS has the highest tax rate. Filing MFS also disqualifies you from most of the credits/deductions that are available for the other filing statuses (see below). If you file MFS, you must enter your spouse’s full name on line 3 of Form 1040, and enter your spouse’s Social Security number in the heading section of Form 1040. You can change a MFS return to a MFJ return within three years by filing an amended return. You cannot change from MFJ to MFS however. The disadvantages of filing Married Filing Separately There are certain disadvantages if you choose the MFS filing status; these are as follows: If your spouse itemizes deductions, you must also itemize, and therefore will not be eligible to claim the standard deduction. You cannot take the credit for child and dependent care expenses in most cases. You cannot take the education credits, the deduction for student loan interest, or the tuition and fees deduction. You cannot take the earned income credit. You cannot exclude from income any interest earned from Series EE U.S. Savings Bonds that was used for higher education expenses. You cannot take the credit for adoption expenses in most cases. You may have a smaller child tax credit than if filing jointly. Your capital loss deduction is limited to $1,500 (instead of $3,000 for all other filing status). Also, if you lived with your spouse at any time during the year and filed MFS, you: Cannot claim the credit for the elderly or the disabled. May have to include more Social Security benefits received in taxable income. Cannot roll over amounts from a traditional IRA to a Roth IRA. (These disadvantages will become more apparent as you go further through this publication.) HEAD OF HOUSEHOLD (H/H) If you are unmarried, or married but considered unmarried (see below) on the last day of the tax year, you can file Head of Household if the following conditions apply: (a) you paid more than half the costs of keeping up a home for the tax year, and (b) a qualified person (see definition below) lived with you for more than half of the tax year. In determining the cost of keeping up a home, you include costs such as mortgage interest, real estate tax, home insurance, repairs, utilities, and food. You cannot include amounts you paid for clothing, education, medical treatment, vacations, life insurance, transportation, or the rental value of your home. In determining the amount you paid in keeping up the house, you must exclude any payments received from public assistance. Definition of a qualifying person To file as Head of Household, the general rule is that you must have a qualifying person living with you for at least half of the year. A qualifying person includes any of the following: An unmarried child, including your own child, grandchild, stepchild, or foster child. The child does not necessarily have to be a dependent on your tax return, but must live with you. A married child, including your own child, grandchild, stepchild, or foster child. In this case, the child must be a dependent on your tax return. A relative who is a dependent on your tax return, such as your parent, grandparent, brother, sister, stepbrother, stepsister, half brother or half sister, niece or nephew. Parent not living with you There is one exception to the rule that your dependent must live with you to qualify you for the Head of Household filing status. You can file as Head of Household even if your parent does not physically live with you, as long as you paid more than half the cost of keeping up a home that was the parent’s main home for the entire year. For example, your parent could be living in a rest home or home for the elderly. Temporary absence You and your qualifying person are considered to live together even if one or both of you are temporary absent from the home due to special circumstances such as illness, education, business, vacation, or military service. Married considered unmarried If you are married and separated from your spouse, under tax law you may be considered unmarried, and may qualify to file H/H instead of MFS. You are considered unmarried on the last day of the tax year if you meet all the following tests: You must file a separate return. You must have paid more than half the costs of keeping up a home for the tax year. You must not have lived with your spouse during the last 6 months of the tax year. Your home was the main home for your child, stepchild, or eligible foster child for more than half of the year. You must be able to claim an exemption for the child. You still meet this test if the child was not claimed because you allowed the non-custodial parent to claim the exemption for the child. Other points to consider Note that a person who is your qualifying relative, ONLY because he or she lived with you as a member of your household (no blood or marriage relationship) for the entire year, CANNOT qualify you for the H/H filing status. For example: a live in boyfriend or girlfriend, or boyfriend’s or girlfriend’s child, does not qualify you for H/H. Neither does a cousin qualify you for H/H. QUALIFYING WIDOW(ER) WITH DEPENDENT CHILD (Q/W) Surviving spouses receive the same standard deduction and tax rates as taxpayers who are filing Married Filing Jointly. In the year of your spouse’s death, if you do not remarry, you can file a joint return with your deceased spouse. For the following two years, you can use the Qualifying Widow/Widower with Dependent Child filing status if you have a dependent child. After two years, if you have not remarried, your filing status will be either Single or Head of Household. You can consider the Qualifying Widow(er) filing status if you are a widow(er) and: You could have filed a joint return with your spouse for the year your spouse died. Your spouse died in either of the two tax years preceding this current year. You have a child or stepchild who qualifies as a dependent. This does not include a foster child. You paid over half the costs of keeping up a home for the entire year. The child lived in your home all year, except for periods of temporary absence. Note however, that the surviving spouse cannot continue to claim an exemption for the deceased spouse in the two years that he/she is allowed to use the Q/W filing status; he/she can only claim the filing status, and thus take the same standard deduction as a married couple filing jointly. Some Tax Planning Points If you and your spouse each have income, it might be wise to figure your taxes both on a joint return and on separate returns, and choose the filing status that gives you the lower combined tax. Generally, you will pay more combined tax on separate returns than you would on a joint return because the tax rate is higher for the MFS filing status. However, if both you and your spouse have large incomes; and both of you have deductions, filing MFS could result in lower tax, as separating the incomes will place you both in a lower tax bracket. If your spouse dies during the year and has a tax liability, for example because there was not enough tax withheld for his/her salary, you might want to consider filing MFS. If you file MFJ you will be responsible for the entire tax. Remember, you may qualify to file H/H if you are single, and support your parent who is in a retirement or nursing home. Since each filing status has its own tax rate and its own standard deduction, you can choose to file under a different filing status each year, if you qualify to do so. Remember, also, that if you are married but separated, you may file H/H, but you and your spouse must be living in separate places. Living in the same house under “emotional estrangement” does not qualify as living apart for H/H purposes. If you are serious about doing your own taxes, you will find these two publications to be pretty helpful: “How To Save Money By Ensuring That Your Tax Returns Have Been Properly Prepared” and “How To Use Turbo Tax To Confidently Prepare Your Tax Returns.” Available in Kindle format and in paperback Visit: www.mgbfinancials.com
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